The furore over the Association of Mutual Funds in India (AMFI) limiting the commission paid to mutual fund distributors at the time of sale to 100 basis points is a trifle over the top.

Many distributors who believe in engaging with clients in a long-term relationship would not be fazed by this cap as they will continue to receive trail commission — the money the distributor gets at the end of each year — anyway. Let’s admit it. This practice of paying a high upfront commission — to sell products that may not be the best fit for investors — had to be stopped sometime. There was a gap in the regulation that was being exploited by the industry. Since the expense that can be charged to the customer was capped by SEBI, the mutual fund companies were delving into their own coffers to pay commission, at times higher than 5 per cent.

Now, these high commissions were mostly being paid for selling new fund offers of close-ended funds — which proliferate in bull markets and are difficult to exit if the performance is sub-par. In the December 2014 quarter, only 10 new open-ended schemes were launched by MFs; that garnered ₹1,284 crore. The number of close-ended schemes launched in this period was 88, raising ₹10,917 crore.

Since old hands in mutual fund investing are likely to steer clear of new fund offers as well as close-ended funds, these funds were largely being sold to investors who depend on their agents for fund selection.

It needs to be noted that SEBI has not interfered in this instance and the circular has been issued by AMFI alone. This is the equivalent of a mild reprimand. The industry should take this in the right spirit and move on. There is no denying the benefits of this move — investors will be sold products based on their qualitative merits, distributors will focus on retaining clients, and new fund offers of close-ended schemes will hopefully reduce.

Deputy Editor and Head of Research

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